Question of the Day

Did illegal voters swing any congressional races?

On Saturday, President-elect George W. Bush finally was able to announce his first cabinet appointment, selecting Colin Powell as his Secretary of State. The following day he named Condoleezza Rice as his National Security Adviser. These were easy choices, long expected. However, it appears that the rest of Bush's staff selections are not going as well, the result of having lost half the already-too-short transition period to Al Gore's vicious rear guard fight for the presidency.

It certainly is appropriate for Bush to make his foreign policy announcements first, in order to calm the nerves of our allies, always jittery about changes in the White House. But now he must move with dispatch in putting his economic team in place. The international situation is relatively calm, but there are storm clouds on the economic horizon that require immediate action.

It is now almost a foregone conclusion that a brief recession will hit early next year. Some commentators are even suggesting that this bodes well politically for Bush. First, they say, a recession some time in the next four years is virtually inevitable. Better, then, to get it out of the way early so that the economy will be on the upswing in 2004, when he will be running for re-election.

Second, a slowing economy improves the chances that Democrats in Congress will support Bush's proposed tax cut. Tax cuts are a traditional form of economic stimulus, often enacted to counteract the effects of a recession.

These points may be true enough, but there is an important flip side to the coin that is very bad for Bush, which is the fact that any slowdown in growth is going to blow the budget surplus to pieces. Current budget projections essentially assume that growth will be continuous for the foreseeable future. Once that assumption is destroyed, the prospect of vast budget surpluses as far as the eye can see completely evaporates.

Bush is likely to face a situation in which he will be trying to cut taxes at the same time the surplus is contracting. Thus, while the political chances for tax cuts may be improving for macroeconomic reasons, they will be deteriorating for budgetary reasons. At the very least, this is going to force Bush to scale back his tax plans severely, and perhaps make some of his cuts temporary, rather than permanent.

One way out of this box would be for Bush to embrace dynamic scoring for his tax cuts. Normally, budget projections assume that tax cuts reduce revenues dollar-for-dollar, regardless of their impact on saving, investment or growth. Dynamic scoring, by contrast, takes into account the impact of tax cuts on economic variables, which tends to reduce the budgetary impact of tax cuts. A 10 percent tax rate reduction, for example, might only reduce revenues by 5 percent because faster growth will expand the tax base.

Dynamic scoring is a tough sell mainly because the enemies of tax cuts anytime, anywhere always ridicule it. They know that traditional scoring methods, by exaggerating the budgetary cost of tax cuts, make it more difficult politically to enact them. Unfortunately, historically, Republican presidents and congressional leaders have always backed away from dynamic scoring in the face of such criticism. A case in point: The rules of the House of Representatives were changed to allow the use of dynamic scoring if requested. But in the 6 years since, no one has made such a request.

Under the best of circumstances, it is difficult enough to put major tax bills together. Even if Bush had all his top Treasury and Office of Management and Budget officials in place and working full time on transition, there probably is still not enough time to be ready on Jan. 20 to send a tax bill and revised budget to Congress. (The official administration budget for fiscal year 2002 is presently being put together by Bill Clinton.)

Thus, the earliest that a tax cut could be enacted is early spring, and it probably wouldn't have any significant impact on the economy for several more months. At this point, it will be too late for it to have a countercyclical effect. For that to happen, the tax cut would already need to have been passed into law and made effective Jan. 1. But Clinton's and Gore's obstinacy made that impossible. Therefore, the failure to take prudent, proven actions to counter the recession is theirs.

The probability of an economic downturn also puts a premium on getting Bush's appointees on the Federal Reserve Board right away. Currently, there are three vacancies at the Fed, including the vice chairman's position. Bush needs to get his appointees into these powerful positions as soon as possible, because an easier monetary policy is essential to mitigating an economic downturn. The longer the Fed delays taking this action, the worse the recession will be and the slower the recovery.

Normally, the Treasury Secretary is the point man for administration appointments to the Fed. That is an important reason why Bush needs to name his nominee for this critical position very soon. Unfortunately, there does not seem to be an obvious candidate for Treasury, as Powell was for State. Indeed, so muddled is the Treasury selection process that the Washington Post even reported that Bush planned to keep Democrat Lawrence Summers on the job, an absurd notion if ever there was one.

Hopefully, Bush can make up for lost time in the weeks that remain before inauguration. But he must prioritize his staffing decisions. The nation can get by for a few weeks without having every cabinet post filled. The cost of failing to get an economic team and plan into place soon, however, could be very high. Bush may not be facing an “economic Dunkirk,” as former OMB Director David Stockman characterized the situation facing Ronald Reagan at this point in 1980, but it is getting more urgent by the day.